One factor that definitely moves the currency markets is interest rates. It provides international investors with a reason to shift money from one country to another in search of the highest and safest yields.
The developing interest rate spread between countries has been the main focus of professional investors. However, a lot of individual traders don’t have the idea that the absolute value of interest rates is not what’s important. And what really matters are the expectations of the direction of interest rates in the future. Traders must familiarize themselves with what makes a central bank tick because it will give them a leg up when it comes to predicting their next moves, as well as the eventual destination of a given currency pair.
The U.S. Federal Reserve System (The Fed)
Perhaps, the Federal Reserve is the most influential central bank around the globe. Currently, the U.S. dollar is on the other side of about 90% of all currency transactions. And the Fed’s sway has a sweeping effect on the valuation of a lot of currencies. The group within the Fed that concludes the interest rates is the Federal Open Market Committee (FOMC). This consists of seven governors of the Federal Reserve Board and another five presidents of the 12 district reserve banks.
The European Central Bank (ECB)
Established in 1999, the European Central Banks’s governing council is the group that decides on changes to monetary policy. The ECB, as a central bank, is not into surprises. As a result, if it plans on making a change into interest rates, it would usually provide the market ample notice by warning of an impending move by giving comments to the press.
The Bank of England (BoE)
Under the leadership of Mervyn King, the monetary policy committee of the Bank of England is typically touted as one of the most effective central banks.
Now, to maintain its monetary and financial stability, the BoE’s policy mandate is to hold prices as stable as possible and to keep confidence in the currency.
Bank of Japan (BoJ)
The Bank of Japan has an even more active interest than the ECB does in avoiding an excessively strong currency. And this is because Japan is famous for being independent when it comes to exports. Also, the central bank has made a mark to go into the open market to artificially weaken its currency by selling it against U.S. dollars and euros. Aside from that, the BoJ has always been extremely vocal when it feels concerned regarding excess currency volatility and strength.
Swiss National Bank (SNB)
Contrary to most central banks, the Swiss National Bank determines the interest rate band instead of a specific target rate. Then, similar to Japan and the eurozone, Switzerland is also an export dependent. This means that the SNB does not show interest in making its currency a strong one. As a result, its general bias is to be more conservative with rate hikes.
Bank of Canada (BoC)
The Bank of Canada has done an excellent job of maintaining its inflation within the band – 1-3%- since 1998.
Reserve Bank of Australia (RBA)
To guarantee the stability of the currency, the Reserve Bank of Australia keeps full employment and economic prosperity and welfare of the people in Australia.
Reserve Bank of New Zealand (RBNZ)
Different from other central banks, the decision-making power on monetary policy only rests with the central bank governor. Also, it pours its attention on targets because failure to meet it might end up in the dismissal of the governor of the RNBZ.